Vancouver CPA | the Importance of an Organized Income Statement
Not only do many business owners not have a well organized income statement according to Vancouver CPA. They also do not know how to read this important document. And they also do not know how to use it, to make informed financial decisions.
In fact, not only do 80% of small business owners in Canada. Have large knowledge gaps in basic business finances. According to a survey done by Intuit’s, the makers of QuickBooks. With 80% of small business owners scoring less than 70% on a business financial literacy test.
But in addition to that, according to industry Canada, 29% of failed entrepreneurs. Said the reason why they failed, was because they ran out of money in their business. And while there are many reasons why entrepreneurs run out of money.
When they make financial decisions without consulting their income statement. They often end up making poor financial decisions. That cause them to run out of money in their business. Which can cause them to be forced to close the doors to their business.
Therefore, learning how to organize and then read their income statement. Can be significant. In helping entrepreneurs make more informed decisions financially, that will help them avoid problems. As well as be able to proactively grow their business.
A great example of this says Vancouver CPA. Is helping a business owner understand if they have the money to be able to purchase a large asset. Because if they make that decision without consulting their income statement. And find out that they in fact cannot afford this.
They might end up making this decision, which will cause them to run out of money in their business. That could have completely been avoided in the first place. Also, I an example of how they can use the money to be proactive in their business.
Is if they review their income statement, and realize that they do not have the finances to pay bills, or staff. An entrepreneur can then use that information to be very proactive about increasing their sales and marketing. To help them just and rate enough money to pay their bills.
Help them generate enough sales to grow their revenue, and to become successful as well. This is why Vancouver CPA says it is extremely vital for all entrepreneurs to learn how to organize, read and then utilize their income statement in their business.
The first step to reading the information in their income statement. Is knowing the four main components of an income statement. The revenue will be at the top, which is the gross amount of money they are bringing into the business
The cost of sales is next, followed by general expenses. And finally, other income and expenses at the bottom. For legitimate corporate expenses. They do not necessarily fit into the income or expenses of the business. Such as corporate tax, the owners salary, and expenses or income from rental property.
When business owners understand the information on the page. They will be much more likely to be able to read and utilize the information. To help them make business decisions.
If entrepreneurs do not know how to read their income statement says Vancouver CPA. They may be making financial decisions. That are putting their business at risk. Which is completely avoidable, as long as entrepreneurs learn how to read their income statement.
What business owners should first understand. Is that their income statement should not be longer than a single page. Because it will become much more difficult to read. And then because of that, be much more difficult to understand. When it is several pages long.
If it is too long, then business owners will not be able to read it and understand it quickly. And they will not use it before they make any financial decision in their business. Which is what they should get into the habit of doing says Vancouver CPA.
Four not nor spend any money, whether it is paying bills, running payroll. Or purchasing anything. They need to look at their income statement. So that they can decide if they can make that financial decision or not.
And if it is too long are too complex. Business owners will not read it before their financial decisions. As entrepreneurs going to have to make a lot of financial decisions in their business. Therefore, the easier it is to read, the more likely they are going to use this tool.
The reasons why business owners are not able to keep their income statement on a single page. Is because they end up over classifying all of their expenses. Because they think it is going to give them much more information, which will help them understand their expenses.
And be able to analyse their numbers better. But this is not the case, all it does is ends up making the information much more complicated. And harder to understand. Therefore, Vancouver CPA recommends keeping categories as simple as possible, so that it is easy to categorize and understand.
And if entrepreneurs want to still have this additional information. So that they can analyse their expenses later. The recommended thing to do. Would be to use subaccounts, so that instead of adding new categories. Which will make the income statement longer.
Business owners can use subaccounts, and pull reports from their accounting software never they want. To be able to analyse those expenses in the way that is meaningful for them. But in a way that does not make their income statement unusable.
It may take a lot of time and practice for entrepreneurs to get good at reading their income statement. Which is why they should start when their business is small. Because it will be a lot easier to understand the information they have lower sales.
And then as their business grows, they will be able to grow their understanding. This will allow business owners to practice reading and understanding their income statement. And making decisions, early on in their business. So that when their business grows, they will be able to continue to do the same, which will significantly help their business.